Innovate or Die: Wisdom from Apple, Google and Toyota

Complacency kills creativity. In his new book, Unrelenting Innovation, University of Southern California business school professor Gerard Tellis explains why seemingly invincible market leaders stumble when upstart rivals introduce breakthrough innovations. TIME spoke to Tellis about the lessons learned from these failures and how sluggish corporations — and employees at those companies — can get their mojo back.

In your book you say success is a curse. Why?Success leads to lethargy and overconfidence. It leads a firm to protect the causes of its success — mainly its current products. But nothing lasts forever. Current products are doomed to obsolescence. There are still a few old companies in old markets, like Coke and soap, where the old product lasts decades, but in the high-tech world, change is constant, so you just cannot stand still. Protecting your current product is a formula for disaster. It’s the incumbent’s curse.

One of the prescriptions you suggest for companies to avoid obsolescence is to cannibalize their own products. Explain.The reason you need to cannibalize is because change is coming so fast and new technologies are coming and obsoleting old technologies. If you don’t cannibalize your own products, your competitors will. A classic example is Apple, which introduced the iPhone and cannibalized the iPod.

How does an established firm shift from stodgy to innovative?The person at the top needs to realize that a change is needed. Take Toyota. At one point, it was just focusing on increasing sales of its highly successful Camry. Then when the U.S. government began to emphasize fuel efficiency, Toyota’s CEO set up an independent unit and tasked it with developing an electric car in a very short time. Isolating the unit from the corporation, giving it a clear charter and giving it autonomy enabled it to innovate and not be stuck with the major culture of the corporation. The result was the Prius.

O.K., so what went wrong with Kodak, which was an innovator in digital photography (despite its solid lead in the film business) but still failed?Kodak actually had most of the patents for the digital-photography technology, but it didn’t commercialize them aggressively because that would have cannibalized its film business. Instead, other firms licensed Kodak’s technology and commercialized it. Kodak couldn’t make that switch from a culture of film to a culture of digital technology.

Speaking of incumbents, is Apple losing its edge?The scary thing with Apple is that a lot of its recent success came from the intuition of Steve Jobs. He had this idea that simplicity and ease of use will win out, and he came out with a series of hits. But Apple was very much a top-down company, and that’s the scary part. The type of innovation that will succeed in the long run is not top down. It is bottom up, because one person cannot have a hit every time. You need to tap the mass of employees and let ideas percolate up. Google has more of a bottom-up approach, and I think Google is on a better footing than Apple.

How do you encourage bottom-up thinking at a company?The tendency in the U.S. is to give small token rewards for success and penalize failure. What companies need are asymmetric incentives, where you have big rewards for success and small penalties for losses. Google is a good example. It says, Fail early, fail often and move on. Learn from failure.

But you can’t fail all the time, or people won’t take you seriously. Companies — and people in general — are hardwired to follow winners.If you are forced to choose between a person who has had three wins vs. a person who has had 11 losses, you are going to go with the winner. But that is not the choice that companies most often face. The choices are, a person has failed once, and he gets fired. A good example is Apple, which fired its director of maps. I mean, why would you do that? One failure, why does it matter?

How long does it usually take for a big innovation to find success?On average it takes about six years for a new product to take off. Initially, the products with the new technology are often inferior. But as the quality improves and the price drops, they offer a better value than the old technology.

Six years is a long time to wait to see if a new idea will work. Does that mean you need a truckload of cash to be a successful innovator?Cash is not the problem. Cash may be the enemy, because when you have a lot of cash, you feel self-sufficient and get arrogant. So cash is part of the incumbent’s curse. A lot of corporations, like HP, Nokia, Research in Motion, had the innovations, but they were not willing to commercialize them.

How do you measure progress when an innovation is not yet a clear success?You need to track the performance-to-price ratio of all these technologies. For example, in photography, you track the resolution per dollar of film vs. the resolution per dollar for digital and see how these curves are moving year to year. If resolution per dollar on digital is flat, then you can junk the technology. You can also measure progress through growth in sales (even if you have no profits), investors willing to back your efforts, online reviews and whether leading-edge consumers are raving about the technology.

Your ideas sound similar to those of Harvard professor Clayton Christensen in his 1997 book The Innovator’s Dilemma. What’s different?Christensen seems to say that every large firm is doomed to failure. He never cited this point of [corporate] culture. I point out why big companies are in danger, the incumbent’s curse, and then I give very specific traits that can enable innovations and very specific practices that can engender those traits in the organization.

Your book focuses on risk taking on a company level, but aren’t those same ideas applicable to the individuals within those businesses as well?All of us who have been 10 or 20 years in a job have to ask ourselves whether we are not already beginning to suffer from the incumbent’s curse. It takes a crisis to get an incumbent to change. The people who have done the best after losing their job have started entirely new businesses and made a success of it.

So how do successful companies stay relevant?The best way to succeed in the long run is to be open to the change and to tap the ideas from people within the organization. The problem occurs when firms fight the change and cling to the old business. Then the doom is certain.